Union Tribune

May 9, 2002

A-1

State was easy prey for power ploys, experts say

By TOBY ECKERT 
COPLEY NEWS SERVICE 

WASHINGTON Despite the political furor caused by
revelations of Enron Corp.'s apparent manipulation of California
electricity prices, energy experts said the state's poorly
designed power market was ripe for schemers.

State officials were warned that such tactics were likely when
they created the system in 1996, energy analysts said.

"People who do a lousy job designing markets get lousy results,"
said Richard J. Pierce Jr., a regulatory expert at George
Washington University Law School. "Most (of the Enron tactics)
would not work elsewhere."

Gov. Gray Davis and other California officials have
acknowledged flaws in the state's power deregulation plan,
approved unanimously by the Legislature before Davis became
governor. But they say that does not excuse alleged wrongdoing
by Enron and other power sellers.

"It is very clear that Enron attempted to take advantage of the
rules, drive up prices in California, create artificial shortages,
cause blackouts and make a killing all at the same time," Davis
said.

Analysts said the weaknesses in state law were compounded by
lax federal oversight of the wholesale power market and the long
refusal by federal regulators to take allegations of manipulation
seriously. 

"You can't say California was warned but not give California or
the federal government the essential information about what's
going on. This is a completely opaque system," said I. Michael
Greenberger, a former top regulator for the Commodity Futures
Trading Commission.

Internal Enron memos describe how electricity traders for the
company sought to drive up wholesale power prices in California
by creating phony congestion on the power grid, evading price
caps and utilizing other maneuvers. Federal regulators
investigating charges of manipulation of West Coast power
markets released the December 2000 memos.

Several energy market experts said they were not surprised by
the practices outlined in the memos, which went by such
nicknames as "Death Star" and "Ricochet."

"A lot of the things that are described in there are very
well-known tactics," Pierce said.

"What was a surprise to me was that they had a name for all of
these strategies and they were so well-organized," said Ken Rose,
senior economist at Ohio State University's National Regulatory
Research Institute.

The flaws in California's power market notably its exclusion of
long-term power contracts, its reliance on more volatile
short-term markets and a dearth of new power plants were
well-known to energy traders, the experts said.

"Certainly the market rules in California were a problem," Rose
said.

Pierce said experts told California officials of potential problems,
including congestion scheming, when they were designing the
deregulation plan.

"They decided to go instead with the approach that Enron
encouraged them to use," he said, referring to Enron's lobbying
to shape the California plan.

The experts were reluctant to judge whether the tactics outlined
in the Enron memos were clearly illegal.

"I think they're very troubling documents. They certainly show
an intent that is not consistent with the public interest,"
Greenberger said.

Gregg Fishman, a spokesman for the California Independent
System Operator, the state power grid manager, said: "It
wouldn't be our place to determine if laws were broken. We
definitely are looking at whether regulations have been broken. I
think we can definitely say 'yes' at this point."

In fact, two of the Enron memos discuss ISO prohibitions against
"gaming" the market and discuss penalties "should it discover
such activities." They include fines, suspensions and antitrust
investigations.

All of the experts interviewed agreed there is a need for greater
disclosure of energy trading practices. Many of the complex
trades in which Enron specialized were freed from federal
reporting requirements and regulations by Congress in 2000.

"It's like the entire federal structure has gone to sleep on this,"
Greenberger said.

While the Federal Energy Regulatory Commission recently
moved to tighten reporting requirements for power marketers
under its jurisdiction, the Senate last month rejected an effort to
re-impose regulations on computerized energy trading and
"derivatives" used to set future prices for electricity.

Sen. Dianne Feinstein, D-Calif., who championed the legislation,
hopes the Enron disclosure will give the effort new momentum.

"Many of my colleagues argued that there was no manipulation,"
she said. "I hope that the 50 of my colleagues who voted against
(the legislation) would reconsider their opposition."